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Application of Volatility-Managed Portfolios in the Context of a Volatility Index

Author

Listed:
  • Abhishek Subramanian
  • Parthajit Kayal

    ((Corresponding Author)Assistant Professor, Madras School of Economics)

Abstract

This paper studies the volatility-managed portfolios of Moreira and Muir (2017) and analyses whether the volatility-management trading strategy provides a large utility gain for mean-variance investors for the CBOE Volatility Index (VIX) across multiple equity factors. Upon direct comparison, we document that the volatility-managed scaled factor earns higher returns compared to its original unscaled counterpart. The results from our in-sample spanning regression supports the above findings indicating that volatility-managed factors outperform the original factor by extending the mean-variance frontier even after controlling for additional factors. This result is significant in particular with the volatility-managed momentum factor. The ex-post optimization parameters also suggest a positive Sharpe ratio and CER percent (Certainty Equivalent Return) across equity factors.

Suggested Citation

  • Abhishek Subramanian & Parthajit Kayal, 2023. "Application of Volatility-Managed Portfolios in the Context of a Volatility Index," Working Papers 2023-242, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2023-242
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Volatility-managed portfolios; Volatility-management; Momentum;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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